Saturday, January 30, 2010

The proposed deal for Quad/Graphics to buy rival printer Worldcolor makes it difficult for another bidder to step in, though stock analysts predict R.R. Donnelley will try.

The Quad-Worldcolor agreement says neither company can encourage a competing proposal or “knowingly participate in any way in discussions or negotiations with, or furnish or disclose any information . . . in connection with any Acquisition Proposal.” The one exception: if one of the companies receives a proposal that its board of directors deems better than the proposed Quad-Worldcolor deal.

That means Donnelley or any other suitor would have to make a superior bid without having the intimate knowledge of Worldcolor that Quad executives no doubt have gained the past few months. Donnelley has plenty of people who worked for Worldcolor’s predecessors, but they lack up-to-date information on customer negotiations, labor contracts, capacity utilization, and other important areas.

Stock analysts at RBC Dominion Securities praised the proposed deal but said Donnelley could top it, reports Andrew Willis of the The Globe and Mail of Toronto. They said Quad’s proposal for Worldcolor values it at up to $13.70 per share but that Donnelley could bid more than $15 per share “and still have a deal that makes economic sense,” Willis reported.

RBC noted that Donnelley competes with Worldcolor in more businesses than Quad does (such as telephone directories and short-run publications), creating more potential synergies from a Donnelley purchase of Worldcolor. Donnelley made three attempts last year to buy Worldcolor’s predecessor, Quebecor World, but that was complicated by Quebecor’s bankruptcy reorganization.

The RBC report was issued before the complex (118-page) agreement between Quad and Worldcolor had been made available on the Web sites of U.S. and Canadian securities regulators. The agreement indicates that Quad will establish a wholly owned subsidiary that will “amalgamate” with Worldcolor into a new company known as “World Color Press Inc” that will have its registered office in Montreal.

Don't read too much into that last statement. It says nothing definitive about what the parent company will be called or where it will be located. Perhaps it indicates that Quad will use the Worldcolor (brand name) and World Color Press (legal name) in Canada, where Quad is hardly known.

With the Quadracci family maintaining voting control of the new Quad, it seems likely that the headquarters will remain in Wisconsin.

"Quad is very invested in Wisconsin," Joel Quadracci, Quad's chairman and CEO, told the Milwaukee Journal Sentinel this week. "My hope is that we actually grow jobs in Wisconsin," Quadracci said, calling the company's five plants in the state among the company's most efficient.

Thursday, January 28, 2010

More than six months ago, published reports warned about a problem with Intelligent Mail barcodes — the practice of letter carriers crossing out the barcode on misaddressed mail. Today, the Postal Service finally got around to correcting the problem.

The January 28 issue of the Postal Bulletin includes an item called “Do Not Obliterate the Barcode” that contained the following:

“The Intelligent Mail® barcode contains important data that is used to provide mailers — including the Census Bureau — with information, such as when the mailing entered the mailstream and undeliverable or address correction information. But technology cannot reliably produce this information if it can’t read the barcode.

"That’s why the Postal Service™ is telling employees to make sure they don’t obliterate the barcode as mail moves through the system. Specifically, employees should not mark through, obliterate, or affix any labels over the Intelligent Mail barcode.”

It also included a reproduction of a poster (below) being used to brief employees on the issue.

Back in July, Monica Lundquist of Window Book Inc. published an item about crossed-out IMbs, and other Web sites subsequently did the same. I'm told that postal officials were made aware of the issue more than a year ago.

Lundquist described what typically happens when a letter carrier ends up with undeliverable mail: "When the carrier determines that the recipient is no longer at the address on the mailpiece, or that the mailpiece is otherwise undeliverable as addressed, the piece is sent to a Computerized Forwarding System (CFS) center for further processing. The CFS sites are where the ACS notices are generated. Before this is done, however, the mail carrier manually crosses out the barcode on the mailpiece so that the piece does not get re-directed to the old or bad address."

That's fine for traditional barcodes. But when it happens to Intelligent Mail barcodes, the Postal Service is not able to process the address correction in the Intelligent Mail program. Mailers using IMbs for address correction are reporting huge problems, which is one reason Dead Tree Edition has referred to full-service IMb discounts as The Postage Discount No Mailer Wants and to IMbs as FUBAR (Failed Unbelievably Bureaucratic Addressing Regulations) codes.

Lundquist noted the problem could be avoided by training letter carriers not to cross out IMbs. But she added, rather prophetically: "However, since there are tens of thousands of mail carriers across the country, the likelihood of this training getting accomplished quickly and thoroughly is not very high."

Tuesday, January 26, 2010

The American printing industry's new Odd Couple provided some insight today into Quad/Graphics' proposed purchase of Worldcolor but left several key questions unanswered.

At the companies' joint presentation to stock analysts, Mark A. Angelson did most of the talking even though his company is to be the acquiree rather than the acquirer. But that made sense given the need to communicate that the deal is favorable for Worldcolor and Angelson's experience in selling major mergers and acquisitions in the industry.

"Let's just say I've been to this movie before on multiple occasions," said Angelson, referring to his extensive merger and acqusition experience in the printing industry. "This is the most compelling combination that I've seen."

When the merger is completed this spring or summer, Angelson will give up executive duties to "lend integration and public company expertise" to Quad as a member of its board, according to the presentation.

The combined company will be led by the other member of the Odd Couple, Quad CEO Joel Quadracci, who by all accounts has proved to be a capable leader of the company his father founded. But he has never made a major acquisition or faced Wall Street's scrutiny.

Quad "built itself from greenfield growth" and has always emphasized that "our private status meant that we could manage for today but also for the long term," Quadracci said. He promised that the company would continue to focus on the long term and "the values that have made us successful."

The two CEOs could hardly be more different. Originally an M&A lawyer, Angelson, in his late fifties, has been the printing industry's Great Consolidator, responsible for rolling up such companies as Moore Wallace, Banta, Perry Judd's, and von Hoffman. The 39-year-old Quadracci was born with printer's ink in his veins and groomed to head up Quad -- no doubt with many a sermon from his late, colorful father about the benefits of being privately held and of building rather than buying.

But after numerous discussions that started with a lunch back in August, just a month after Worldcolor emerged from bankruptcy protection, the two apparently began to see eye to eye about the future of their companies. They spoke admiringly of each other at today's presentation.

Some of the questions still to be answered about the deal include:

Sale Price: The Wall Street Journal put the price at $1.4 billion, but "that's not our number," Angelson said. "We're not going to know until we see how the shares trade between now and the closing."

Synergies: The stated synergies of $225 million in the first 24 months ("I find Joel's number to be a touch conservative," Angelson noted.) no doubt include some plant closings, but that subject was avoided at the presentation. Not so on Web forums like Topix, where Quad and Worldcolor employees traded speculations about who would get the ax. Most assumed that only Worldcolor plants would be closed (which I don't think is a safe assumption).

Change of Control: I'm told that many major print buyers have change-of-control clauses in their contracts, giving them the right to get out of or renegotiate their contracts if the the printer changes hands. It's not clear whether Quad's going public would trigger those clauses.

Anti-Trust Challenges: By Angelson's estimate, the combined company's $5 billion in annual revenue will give it only 3% of the U.S. market, meaning that the printing industry will still be "highly fragmented". But a quick-print shop that produces menus for local restaurants is hardly in the same business as an outfit that prints, binds, mails, and ships millions of Parade magazines or L.L. Bean catalogs. Pressed for the combined company's market share in long-run printing, Angelson responded, "That's not a market, it's a segment." My guess is that anti-trust authorities won't block the deal outright but might require one or more plants to be sold off, just as Abitibi had to sell its Snowflake, AZ mill before merging with Bowater.

A Good Deal? Both CEOs said the deal would be good for their companies, but analysts and investors will have difficulty deciding for themselves until Quad issues public financial statements, which could take at least a month.

Print Pricing: Overcapacity has been steadily forcing print prices down, but that could change in parts of the market if there is one less supplier and not so many empty presses.

Here are a few quick observations regarding today's stunning announcement that Quad/Graphics has an agreement to buy Worldcolor (AKA World Color Press) and that the combined company's stock will be publicly traded:

Note the press release's reference to “capacity rationalization.” Translation: Some plants will be closed.

Though it is the country's third largest printer, Quad's finances have always been a bit of a mystery. That will change in a month or so when it has to file detailed reports with the Securities and Exchange Commission.

Quad is apparently more profitable than Worldcolor even though it is a smaller company, the press release indicates. That's why Quad's owners will get 60% of the new company and Worldcolor's will get 40%.

Worldcolor has a mix of unionized and non-unionized plants. Quad is non-union and is managed in a way to avoid unionization through employee ownership, generous benefits, etc.

Worldcolor has a variety of cultures and perspectives, reflecting its history of acquiring plants from a variety of companies. In contrast, Quad employees joke about “drinking the Kool-Aid” because of the company’s strong, rah-rah culture -- though some of the plants have definitely developed their own personalities and cultures.

Anti-trust challenges seem likely. Worldcolor has a broader portfolio of businesses; for example, Quad does not deal much with book printing, short-run publications, or telephone books. But they are perhaps the two strongest co-mailers of magazines and catalogs (in terms of the savings they can offer via huge pools). And R.R. Donnelley is the only other North American printer that uses rotogravure, which is especially efficient at huge print orders (more than 1 million).

Another potential hurdle is that either company may entertain, but not solicit, competing offers. Paging R.R. Donnelley.

Monday, January 25, 2010

"I'm not necessarily a Peter Brant admirer, who after all did steal my wife. But he doesn't deserve this hypocritical hatchet job."

-- Nadav Manham

This is a story about an ex-supermodel, a messy and well-publicized divorce, a possible goof by The New York Times, and a major newsprint company that may -- or may not -- be on the verge of bankruptcy.

Rarely does a paper mogul's personal and business life become the subject of a gossipy, in-depth piece in The New York Times, as happened yesterday with Peter Brant, owner of White Birch Paper. But, then, rarely does a paper mogul hang out with the likes of Andy Warhol and Donald Trump and go through a messy and well-publicized divorce from a former Victoria's Secret model.

"The tone of the article is 'What an idiot this rich guy is,'" summarizes Manham, an investment advisor and regular contributor to Seeking Alpha. He concludes the column with that priceless steal-my-wife line quoted above.

"It's a little ironic to read an article about a rich scion of wealth who spends too much money and sees his wealth evaporate -- in a newspaper owned by a company owned by . . . well let's just say that people in glass headquarters should not throw stones," he says.

Besides its muckraking dive into the lifestyles and divorces of the rich and famous, the Times article reports on rumors that privately held White Birch, North America's #2 newsprint producer, is on the verge of bankruptcy.

"White Birch’s own prospects are difficult to divine; as a private company, the particulars are known only to the principals and a handful of debt holders," writes The Times' David Segal. But then he cites a report that White Birch missed an interest payment a few months ago and is renegotiating its debt.

Segal doesn't mention that U.S. newsprint prices have risen more than 20% in the past month and seem to be headed higher. Or that the weak dollar and Chinese fiber shortages are putting U.S. mills in the position of being low-cost suppliers to some growing export markets. Those trends beg a question: If White Birch survived 2009's record decreases in U.S. newsprint prices, why would it go under now that things are looking up? (Update: A more knowledgeable analyst, Verle Sutton of Reel Time Report, has responded to my article by writing that some kind of financial reorganization for White Birch seems almost inevitable.)

Manham criticizes Segal for presenting White Birch's acquisitions as "some kind of ego-fueled all-in bet" on the newsprint industry. Manham says instead that such consolidation "was the least-bad way to effect the capacity reductions that the industry needed and to improve per-unit competitiveness against new foreign competition."

"The strategy kind of worked," he writes, because North American newsprint prices have held up fairly well given huge declines in demand.

Saturday, January 23, 2010

Pity the Pacific salmon: It expends all its energy swimming upstream, then gets screwed and dies.

Several North American papermakers know the feeling, as evidenced by several events this past week:

Rick Willett announced his resignation as CEO of the continent’s largest maker of magazine paper, NewPage, saying, “After considerable personal reflection on my longer term career interests, I have made the difficult decision to leave NewPage to pursue opportunities in other industries." My guesses as to what he might have left unsaid:

“Other industries – yeah, like ones where you can actually make a profit.”

“Angry customers, lots of half-idle machines, and a mountain of high-interest debt: My work here is done!”

“It’s time to move on to another chapter in my career, and I don’t want it to be Chapter 11.”

AbitibiBowater had to idle its Fort Frances pulp and paper mill because cold weather caused the effluent-treatment system to fail. You mean it gets cold in Ontario?

Nearly 400,000 gallons of black liquor stored at Tembec’s closed pulp mill in Marathon, Ontario keeps leaking before it can be transfered to, of all places, the Fort Frances mill. Some has apparently made it into Lake Superior. Silly Canadians! Why can’t they act like Americans and get big tax breaks for their pulp byproducts?

Speaking of Tembec, the owner of its former mill in St. Francisville, LA, filed for Chapter 11 only 5 months after restarting the shuttered operation to make paperboard and paper bags. Question for the investors in Renew Paper: Tembec concluded 3 years ago that the mill was a dog. Did you bother to check it for fleas before you sinking millions into buying and fixing it up?

Catalyst Paper had a bad-news hat trick this week – a bankruptcy-court lawsuit asking it to return millions of dollars paid to it by Quebecor World, closure of its recycled-pulp operation in British Columbia, and permanent idling of its BC newsprint and directory mill. The Quebecor World bankruptcy trustee is also seeking another $18.5 million from UPM and smaller amounts from more than a thousand other vendors.

And for those counting on a rebound in magazine advertising to lift the paper business, consider this: The latest issue of Newsweek, which is placing a multimillion-dollar bet on upgraded paper, is only 52 pages, including the cover story by President Obama. Chief rival Time has only 56.

Friday, January 22, 2010

The notice above appeared late Thursday night (Pacific time) on the home page of Adage.com. The site was back to normal early this morning.

It’s not often that you see a publisher issue a brutally honest apology, especially one that has a sense of humor and actually enhances the brand’s image. Nice work, folks. Here’s hoping your tabloid-sized dead-tree edition (10.875" by 14.5") passes the “droop test”.

Thursday, January 21, 2010

It may be time to bid farewell to the tabloid-sized American magazine.

A variety of forces have been conspiring for several decades to put oversized magazines onto the endangered-species list. Now the U.S. Postal Service appears ready to put the tabloid magazine (and catalog) out of existence.

Postal regulations scheduled to take effect in June will impose significant penalties on magazines, catalogs, newspapers and other “flat mail” that fail a deflection test – commonly called a droop test. The rules are especially tough on skinny publications and tabloids, according to printers who have conducted extensive tests.

“PostCom’s service provider members inform us that mailers of tabloids are likely to redesign their pieces as quarter-folds to meet the deflection standards,” the Association for Postal Commerce (Postcom) wrote recently to the USPS. Some are considering going to a quarterfold format – folding the tabloid in half and securing it with tabs – which could mean more capital investment for printers and more problems for the Postal Service, PostCom says. Others are considering more radical redesigns.

"Unless we can figure out how to put Viagra into the paper to keep it from drooping, the tabloid size is dead," one magazine publishing executive told Dead Tree Edition.

The video posted here, created by catalog printer Arandell Corporation, demonstrates how to conduct the droop test, though other printers have recommended somewhat different methodology. PostCom’s letter requests that the Postal Service “publish explicit and well-documented instructions on how to perform the deflection test, including a demonstrative video.”

Television helped kill off the iconic photo-news tabloids Life and Look four decades ago. Subsequently, developments in press technology, newsstand display practices, and the need to reduce paper costs have caused most major U.S. consumer magazines and catalogs to adopt the “short cutoff” format, which is 10.5” tall. A notable exception is the 12-inch-tall ESPN The Magazine.

For the most part, the tabloid format – generally, at least 11.5” tall and usually more like 13” – in the U.S. is the province of such trade publications as Nation’s Restaurant News (10.75” x 13.25”) and WWD (formerly Women’s Wear Daily, 10 3/16” x 12 ¾”). Catalogs using the tabloid format also tend to be specialty titles that print and mail fewer than 100,000 copies at a time.

The rapid expansion of co-mailing, which typically reduces postage by 10% to 25% for both magazines and catalogs, the past couple of years pressured the tabloid format because most printers offered little if any ability to consolidate the mailing of tabloids. The exception is Publishers Press, which is focused mostly on producing small-circulation b-to-b and enthusiast magazines rather than the big mass-market titles.

For both Periodicals (magazine and newspaper) and Standard (catalog) classes, failing the droop test will increase postage by 10% to 30%, or even more, in June when the USPS starts imposing penalties.

Results of tests performed by various printers show that the new standards are not kind to tabloids. One found that an 80-page book 9.875”x 13.875” book with a four-page cover failed the test but that cutting a few inches off the height did wonders: A 48-pager of the same width that was only 10.5” tall passed the test, even though it had no cover and used slightly lighter paper.

Tests have been even worse for oblong formats, those with a width greater than their height. That means the new regulations will pretty well kill an idea that occasionally surfaces – reformatting print publications to a horizontal format so that their digital twins are easier to read on a computer screen.

Oversized magazines may still be inserted into newspapers, sold on newsstands, handed out at trade shows, and distributed via alternate delivery. But unless the Postal Service changes the regulations and/or the proposed penalties, the sight of a mailbox containing an oversized magazine or catalog could become extremely rare.

Wednesday, January 20, 2010

The U.S. Postal Service isn't a money-losing operation, just a victim of unfair pension accounting by the federal government, a report from USPS's Inspector General indicated today.

"The current system of funding the Postal Service’s Civil Service Retirement System pension responsibility is inequitable and has resulted in the Postal Service overpaying $75 billion to the pension fund," Inspector General David C. Williams states in the report's introduction.

"Today, the Postal Service continues to be assigned an unfair share of CSRS liabilities," the report says. "Ending the unfair allocation of CSRS liabilities . . . would put the Postal Service on a sound financial footing."

The controversy involves people who worked for the Postal Service both before and after 1971, when postal operations were moved out of the federal government into the (theoretically) independent USPS. The government and USPS are supposed to share the cost of the pension liability, but the OIG report objects to the way the government's Office of Personnel Management allocates the costs:

"As demonstrated in this paper, for employees who worked half of their careers with the United States Post Office Department (USPOD) and half with the USPS, the Postal Service is assigned approximately 70 percent of the cost and the Federal government 30 percent. For an employee who worked 30 years, 20 years before 1971 and 10 years with the USPS, the Postal Service is assigned 50 percent of the cost."

Williams' introduction concludes: "The Postal Service was intended to be self-sufficient. More importantly, ratepayers should pay no less and no more than what is required to fund the Postal Service’s operations. Now, as the Postal Service faces a challenging future, it is particularly important that the Postal Service’s responsibilities be clearly delineated and separated from those of the federal government. The true costs of funding postal operations ought to be absolutely clear."

Friday, January 15, 2010

What do you do when the magazine on which you work is shut down? Keep working on the magazine, of course.

That’s what some of the folks at Editor & Publisher did when the Nielsen Co. closed both the web and print versions of the iconic publication that covers the newspaper industry. Two weeks ago, they set up a blog called E&P in Exile where they continued their excellent reporting and commentary, which goes light-years beyond the usual B&B fare of refried news releases. The idea was to keep the brand alive until someone decided it was worth buying and preserving.

The strategy worked. Nielsen sold E&P Thursday to another publisher, Duncan McIntosh, that plans to continue the magazine. Several staffers wasted no time returning from exile, posting articles on the resurrected E&P site less than 24 hours later.

Best of all, one of my all-time favorite blogs, Fitz & Jen, is back online at E&P. If you want to see how to cover a single industry’s breaking news in a fun yet informative way, check it out.

Folio: questioned how "E&P will mesh with Duncan McIntosh Co. Inc.'s stable of boating publications." That's easy. The company already produces FishRap, which sure sounds as if it could be about newsprint-based publications. And why shouldn't a boating publisher cover an industry that seems to be up the creek without a paddle?

It’s official: The U.S. Postal Service will not be able to carry out the usual May increase in First Class, Standard, and Periodicals rates this year. And there may be a bit of good news for mailers next year as well.

With today’s release of the December Consumer Price Index (CPI), the Postal Service’s annual rate cap for the “market-dominant” classes is -0.36%. That's because lower gasoline prices and the economic recession caused the average monthly CPI in 2009 to be below 2008's average.

The law and regulations governing the CPI-based rate cap do not seem to anticipate such deflation. There is certainly nothing that requires the USPS to reduce rates by -0.36% even though the CPI declined. (Nor will there apparently be pay cuts for postal workers whose unions have cost-of-living adjustments in their labor contracts.)

What is not as clear is how the rate cap for 2011 will be calculated. Most likely it will be a matter of comparing this year’s CPI to 2008’s, not the lower 2009 number. That means that a steady annualized inflation rate of 3% this year would yield only a 1.9% rate cap for 2011, and a 5% inflation rate would mean only a 3.0% rate cap.

Under special circumstances, the Postal Service can institute "exigent" rate increases that violate the price cap. Postmaster General Jack Potter says he won't propose those this year, but the Postal Service's budget deficit might increase pressure for such emergency increases.

Thursday, January 14, 2010

The U.S. Postal Service has recently made it more difficult for customers to submit a change of address, even though reducing mis-addressed mail is one of the agency’s major strategic objectives.

“USPS no longer displays hardcopy change of address (COA) forms at its retail locations,” the Postal Bulletin stated in an issue released today. The Postal Service publication reminded USPS employees of new rules requiring them “to keep Mover’s Guide copies behind the counter so that they are inaccessible to customers without the help of a retail associate.”

“Customers who request a Mover’s Guide should be reminded of the convenient opportunity to submit their change-of-address request at www.usps.com,” the publication continues, failing to provide the complete Web address (www.usps.com/moversguide). Nowhere does it say to tell the customers that they must have a credit card or debit card and pay a $1 fee to submit an Internet Change of Address (ICOA).

Elsewhere in the publication, ICOA is touted as faster to implement, more accurate, more secure, and greener than using the traditional change-of-address form.

The "greener" claim is based solely on the fact that ICOA "eliminates the use of paper, thus preserving our natural resources" -- without mentioning the coal that is burned to power USPS's web servers or its customers' computers. Come to think of it, if we eliminated the use of paper, we wouldn't need to submit change-of-address forms because we wouldn't have much use for the Postal Service.

The Postal Service expects the policy change to increase ICOA by 25%, “generating about $2 million in incremental revenue.” There’s no mention of the cost of making more people stand in line at post offices or of having more mail not delivered to its intended recipient.

Wednesday, January 13, 2010

The U.S. Postal Service is missing out on an opportunity to reduce its costs of handling Periodicals mail, a postal expert says.

Declining mail volume has left the USPS with “a great surplus” of flats-sorting machines, but a large portion of magazines and newspapers are still undergoing more expensive manual sortation, according to Halstein Stralberg. That’s part of the reason that the cost of handling Periodicals supposedly rose 6% in the previous fiscal year even though average copy weights were lighter.

“The tendency of Periodicals flats to be sorted manually . . . is a major contributor to the excessively high Periodicals costs and the inability of the class to meet its attributed costs,” Stralberg said in a report presented to the Postal Regulatory Commission this week by Time Inc. “The likelihood of a Periodicals flat being diverted to manual sorting, even when there is a machine that it could have been sorted on, is considerably greater than for a Standard flat.”

Each year, the Postal Service concludes that publishers are paying less and less of the cost of delivering Periodicals mail. That is increasing pressure to increase Periodicals postage rates to close the gap. Time and other publishers have been presenting evidence to the PRC that the Postal Service’s methods of handling Periodicals and of calculating their costs are both flawed.

Postal officials have acknowledged that Periodicals are frequently diverted to manual sorting, sometimes for “service related” reasons, Stralberg wrote. Others have been less kind, citing the manual sortation of Periodicals as a sort of make-work program for “automation refugees” – postal employees who have become unnecessary because of automation.

The Postal Service acknowledges that it has more employees than it needs. But it has not been able to implement an effective early-retirement program, and Congressional and public opposition have prevented it from closing most of its redundant facilities.

Monday, January 11, 2010

A decade ago, a prominent U.S. paper executive used to refer to Finns as "communists" -- until a Finnish company bought his firm.

Now it's the Finns' turn to complain about America's paper industry, weak currency, and government subsidies.

"The forest industry countries that charge in dollars or have tied their currency to the greenback . . . have a decided competitive advantage," the Helsingin Sanomat wrote in a recap of the Finnish forest industry's past decade. "Exports to the USA have turned unprofitable."

Sounding like an old-school American papermaker, the Finnish newspaper says that currency devaluation used to be Finnish industry's "classic trump card" before the euro and that overseas markets were where "the excess tons were dumped" to protect European price levels. The trouble began when Finnish companies decided to buy North American mills even though they were "in poor-to-appalling shape" and had been "patched up with metal wire and duct tape."

"In 2000, the Finnish forest lords strode like conquistadors of old into North America," states a companion article in the Helsinki newspaper. Like Spain and Portugal of old negotiating a line of demarcation, executives from UPM and StoraEnso even held discussions in 2002 about which company should exercise leadership in the U.S. market for coated papers. But both have largely abandoned their attempts to colonize North America.

UPM closed its Miramichi, New Brunswick operations after seven unprofitable years and is down to two operating machines at the four-machine Blandin, MN mill. StoraEnso sold its North American assets to NewPage at far below their original purchase price, then wrote down its remaining investment in NewPage last year as the American company was on the brink of insolvency.

Declining demand for publication papers and the euro's strengthening versus the dollar both caught Finnish executives by surprise, the newspaper notes. It doesn't mention that last year's huge subsidy of U.S. pulp mills in the form of black liquor credits put another nail in the coffin of Finland's ailing pulp operations.

"Europe has now become the dumping ground where the new forest industry countries offload their surplus," the newspaper laments.

Related articles:

The Infamous UPM-Stora Meeting: the "market leader" discussions between the UPM executive and his Stora Enso counterpart, which were the subject of criminal and civil trials.

Saturday, January 9, 2010

The huge black-liquor subsidy of pulp mills expired last week, but that isn’t stopping the U.S. forest-products industry from tapping taxpayers' money in other ways.

Three-fourths of the pulp and paper companies that received U.S. black-liquor tax credits are signed up to benefit from another biofuel subsidy, the new Biomass Crop Assistance Program (BCAP). But also among the more than 100 mills that have been approved as BCAP "biomass conversion facilities" are at least several that were put at a competitive disadvantage by the black-liquor program, which expired on Dec. 31.

Various paper companies are also getting government help to reduce reliance on fossil fuels, using state grants funded by federal economic-stimulus programs. Just this week, Maine awarded $2 million to Verso Paper’s Bucksport mill and smaller amounts to five other paper companies for investments in such projects as heat recovery and biomass boilers. Last month, Wisconsin made similar energy-efficiency grants totaling about $5 million to four paper companies.

Say hello to Uncle Sam
U.S. paper companies have historically avoided government entanglement. But after some left millions of dollars on the table last year by being late to the black-liquor party, they are definitely keeping an eye on Uncle Sam's wallet now.

BCAP is nowhere near as generous as the black-liquor credits, and the benefits to paper mills and other buyers of biomass will be indirect and uncertain. Boosted by a $517 million appropriation for the first quarter of 2010, the program provides subsidies to suppliers rather than users of biomass.

By being BCAP-approved sites, biomass users – such as paper mills that burn bark, limbs and sawdust to fire their boilers – will presumably be able to buy at less-than-market prices. As with the black-liquor credits, critics are already complaining that BCAP will distort markets in a way that unfairly hurts some businesses without doing much for the environment.

Among the companies and mills on the list of BCAP-approved facilities are:

All of the top 12 producers of kraft pulp in the U.S. and 24 of the 32 known producers. Those companies earned an estimated $8 billion-plus last year from a federal alternative-fuel program simply by following the standard industry practice of using black liquor, a pulp byproduct, as an energy source for their mills.

Eighteen mills owned by International Paper, the #1 recipient of the black-liquor credits.

The Woodland pulp mill in Baileyville, ME, which Domtar reopened last year (while simultaneously closing a Canadian kraft pulp mill) specifically because of the black-liquor credits. An improving global pulp market has enabled the mill to continue running even without the credits.

An East Millinocket, Maine directory mill affiliated with Fraser Papers. Fraser said the black-liquor credits helped push it into bankruptcy reorganization last year; it couldn't get the credits because its kraft pulp comes from Canada. The Maine program also made grants to three other Fraser mills.

The Boise Inc. mill in DeRidder, LA that used the black-liquor credits to grab share – and hurt competitors -- in the newsprint market. Last spring, Boise publicly announced a decrease of more than 20% on newsprint prices, made possible by its unusual use of (subsidized) kraft pulp in its newsprint.

Catalyst Paper’s 100%-recycled newsprint mill in Snowflake, AZ, which lost significant business because it wasn’t able to match Boise’s pricing. It became a poster child for opposition to the black-liquor credits, a supposed environmental subsidy that in this case encouraged a switch from recycled to virgin pulp.

AbitibiBowater newsprint mills in August, GA and Grenada, MS, which also suffered from Boise’s move.

Wednesday, January 6, 2010

Running a national lottery could help the U.S. Postal Service close its multibillion-dollar budget gap, according to a Postal Regulatory Commission official.

A Postal Service-run lottery “could offer the potential for substantial profits for the Postal Service and utilize its current retail infrastructure with its 36,000 retail outlets, claimed to be the largest retail network in the world,” Kenneth E. Richardson, a public representative on the PRC’s staff, wrote last month.

“Sales could be encouraged if winners were tied, for instance, to sales slip identification numbers or other postal purchases or mail tracking numbers. The national scope of the Postal Service could exceed that of current multi-state lotteries in scale which generate hundreds of millions of dollars, annually, if not billions, for their sponsoring states,” Richardson added.

The lottery idea was just a footnote in a motion Richardson filed asking that the USPS “provide estimates of rate adjustments necessary to maintain financial stability” during the next two years “with or without required retiree health benefit payments.” (As Dead Tree Edition and others have pointed out, the billions of dollars in such payments have little to do with retirees and essentially are interest-free loans to the federal government.)

“The estimates will likely include annual increases of several pennies” for a First Class stamp, wrote Richardson, without addressing the issue of how rate increases would affect mail volumes.

Richardson's motion asked that the Postal Service provide the estimates in its annual compliance report. The USPS responded that Richardson was asking it in two weeks to present what amounts to an old-fashioned postal rate case, which would take months to prepare.

The annual compliance report mentions neither the requested estimates nor the lottery idea, but that might not be the end of the story.

The PRC initiated a review of the compliance report this week that postal commentator Alan Robinson notes "could become the equivalent of a 'rate case light,'" with a special emphasis on mail that doesn't cover its costs. And it appointed Richardson as the public representative on the case.

Although the Postal Service is on track to become insolvent within a couple of years, Congress has shown no appetite for wrestling with the problems that vex the USPS. The Postal Service's requests to stem the financial tide -- by eliminating Saturday delivery and eliminating the prepaid retiree-benefit requirement, for example -- will inevitably lead to a Congressional discussion of whether postal rates should be raised. So it makes sense for the PRC to air the issue and allow it to be hashed out before it gets to Congress.

The lottery idea might appeal to Congress because it could improve the Postal Service's finances without increasing the federal deficit or reducing service. Most proposals to let the U.S. Postal Service enter new lines of business run up against Americans' distaste for letting government entities compete with private enterprise. But allowing the USPS to compete with state governments is another story, especially because the states don't have powerful lobbying operations.

Monday, January 4, 2010

Two of America's largest magazine publishers, Time Inc. and Meredith, have reportedly joined forces to buy paper.

The two companies issued joint requests for proposals to potential paper suppliers late last year, according to several sources.

Together, the two probably buy several hundred thousand tons of paper annually -- enough to keep at least a couple of good-sized paper machines busy. The majority is probably coated groundwood (mechanical), but supercalendered, coated freesheet, and reply card are also in the mix. It's not clear how much of their paper the two publishers are planning to buy via the joint arrangement, but it seems to cover at least a major portion of their North American needs.

The two companies -- along with Conde Nast, Hearst, and News Corp. -- are part of a much ballyhooed joint venture to develop a publisher-friendly digital-publishing platform.

With such weekly magazines as People and Sports Illustrated, Time is a major buyer of lightweight coated (LWC) for offset printing, much of it apparently in the range of 29# to 32# (43 to 48 gsm). Meredith's focus on such high-circulation monthlies as Family Circle and Better Homes and Gardens means it is more geared to rotogravure papers and higher basis weights.

An executive from another magazine publisher said his firm has discussed the formation of a paper-buying consortium from time to time but held off because of anti-trust concerns. Another industry veteran, however, said that wasn't the major problem with joint buying efforts.

"We looked into this years ago and found that there were no anti-trust problems as long as we were talking about buying things together rather than, say, selling ads. We had some brief discussions with another publisher, but we both decided it wouldn't work because many potential suppliers were a good fit for one of the partners but not for both," the source said.

"Newspaper companies have had buying co-ops for years. The concept works well for newsprint, which is a commodity where more volume means lower pricing. But with coated paper, so many other factors can influence pricing, and the biggest buyers don't necessarily get the best deals."

Magazine publishers for years have debated whether others in the industry should be viewed primarily as competitors or collaborators. But with the toughest competition coming increasingly from other media, often powered by such goliaths as Google and Amazon, the pendulum is definitely swinging toward collaboration.

Sunday, January 3, 2010

Despite price caps and promises of a rate freeze, the U.S. Postal Service is about to implement a new form of price gouging that will hit small organizations especially hard.As guest columnist Robert W. Mitchell (pictured at right) explains below, Standard-class mailings that are not Move Update-compliant are slated to pay a surcharge of 7 cents for something that costs the USPS barely a penny.

Large mailers will presumably have the expertise to avoid the surcharge, which takes effect tomorrow, by complying with Move Update – though a PostCom podcast indicates that even sophisticated mailers may unwittingly run afoul of the new regulations. (The USPS also has a Web site explaining Move Update.)

The main victims are likely to be small businesses, local non-profit groups, churches, and the like, who in many cases won’t learn of the surcharges until after their mailings have been printed and prepared. Mitchell points out that the surcharge is immense relative to costs and is out of line with the principles of efficient rate setting.

Mitchell knows whereof he speaks. First as a Postal Service employee, then as Special Assistant to the Postal Rate Commission, and now as a consultant on postal-rate issues, he has played a major role in such innovations as Standard-class workshare discounts and the move toward cost-based rates for Periodicals. He can be reached at robertwmitchell@comcast.net.

By Robert W. Mitchell

For a number of decades, mailers wishing to send at Standard rates have engaged in preparation activities. In the spirit of worksharing and cost recognition, many of these have been optional, which, without causing harm to the Postal Service, has allowed mailers to choose what is best for them. Observers, including the Postal Service, have pointed often to increases in efficiency thus brought about. Examples have included ZIP + 4 coding, presorting, prebarcoding, walk sequencing, and dropshipping. Cost differences among letters, flats, and parcels have been recognized in the rate structure as well.

When Move Update services became available, another workshare option could have been arranged. That is, based on lower costs to the Postal Service, a discount for Move Updating could have been offered. Then mailers could have weighed the costs and the benefits, as they saw them, and Move Updated whenever advantageous. That would have allowed mailers the option of purchasing UAA (Undeliverable As Addressed) services at an appropriate price. And UAA services, which the Postal Service has spent years developing, would be put on par with its other services, which include sorting, transporting, and delivering.

However, the Postal Service did not take that course. It chose instead to make Move Updating a requirement for all Standard mailings, no alternatives allowed. Its justification appears to be its analysis that its costs will be lower and that the most advantageous course for each mailer is to finance and follow through with Move Updating. It is inefficient, however, for the Postal Service to substitute its judgment, by regulation, for that of mailers, and it is a mystery why the Postal Service should be opposed to offering its UAA services, as an option, at a fair price.

For Standard mailings that are not Move Updated, if such mailings could still be called “Standard mailings,” the Postal Service took the position that the only rates available would be the rates for Single-piece First-Class, now 44 cents for the first ounce, if letters. The attendant rate increases would be quite large, and particularly so for nonprofit mailers. For example, a 1-ounce nonprofit letter, sorted to 5 digits and entered at a destination SCF, would see an increase of 394.4%. Even higher increases would exist for heavier pieces and flats. When a Federal Register process drew comments that the mailers bearing the increases could well be “small local businesses and nonprofit organizations,” the Postal Service brushed off the possibility of a burden by saying that it “feels that there are many methods mailers can use in order to qualify and make this fit any business model.” [Federal Register, Vol. 72, No. 188 (Friday September 28, 2007), p. 55056].

The Postal Regulatory Commission made it clear in November that noncompliant mailings can remain Standard mailings and that the applicable rates are the reigning Standard rates plus a surcharge. The order also approved a proposal to set the surcharge at 7 cents, which is a smaller penalty than the Postal Service had in mind. But that does not make the rates efficient or fair.

The cost justification behind the surcharge, as provided by the Postal Service, is that a Standard piece intercepted as UAA (and then discarded) costs the Postal Service, on average, 5.2 cents more than a Standard piece that receives ordinary delivery. That gives rise to several important questions:

Why is the 7-cent surcharge so much higher than the 5.2-cent cost? A surcharge may at times be more than 100% of the cost underlying it, but not often when it is first introduced.

Why should each piece in a mailing pay the surcharge, when only a few pieces would be expected to require UAA treatment? If, on average, 20 percent of the pieces in noncompliant mailings receive UAA treatment, and the markup to 7 cents were taken as appropriate, common ratesetting practice would set the each-piece surcharge at 1.4 cents (0.20 times 7 cents).

Why should letters and flats pay the same surcharge, when the UAA cost for letters is undoubtedly lower than the UAA cost for flats? When rate differences are not based on corresponding cost differences, inefficient signals are sent to mailers and inefficient behavior can be expected.

Is the 5.2-cent cost net of any costs avoided by not have to complete delivery on pieces that are intercepted? It is not apparent that the cost study nets these costs out. If it does not, mailers would be in the position of being double charged.

For all of these reasons, the surcharge of 7 cents would seem to be an immense overcharge. Aside from suggesting that the Postal Service does not want to make its UAA services available on reasonable terms, it will drive some mailers to leave the Postal Service, perhaps finding that email will work just fine. These mailers will not come back.

Friday, January 1, 2010

I've been in the magazine business long enough to know that I was supposed to publish this piece at least two weeks ago.

But I also remember when Time for Kids went to press in mid-December with a list of prominent people who died during 2006, missing out on the passing of Saddam Hussein, Gerald Ford, and the Hardest Working Man in Show Business.

"Look at this: They left out James Brown!" my little nephew huffed at me, as if I were responsible for the entire magazine industry.

So I decided to wait until 2009 was dead and gone (and quickly buried, unlike the Godfather of Soul) before providing a recap. Yeah, it was kind of a miserable year, but here at Dead Tree Edition it did have its moments:

Best Joke: That last International Paper article included this quip:"The good news is that, at the next paper-industry convention, liquor will be half-priced because the bar is taking advantage of special government incentives. The bad news is that, to qualify for the program, bartenders will have to add a dash of diesel to the drinks." Some people preferred this non sequitur about President Obama from OMG! I Was Only Kidding, Not Psychic: Twitter as Person of the Year?: "The latest word . . . is that after blowing up balloons for one of his daughter’s birthday parties, he’s being nominated for the Nobel Prize in Physics."

Best Imaginary Headline: "Virgin Hot for Playboy" in Playboy and Virgin Fail to Hook Up, which lamented news that Richard Branson was not interested in buying Playboy Enterprises after all.

Best Imaginary Tweet: From Poe-Tweet for Twitter Quitters, about news that most people who join Twitter stop using it within a month. Limited to 140 characters, I ran out of letters at the end:
Join Twitter, some urged.I pondered it.
OMG, they pleaded,get w/it.
But most tweeters, I read,abandon it,
Finding most tweets 2b just pure s

Dead Tree Moment: I finally got something published in an actual ink-on-paper magazine -- the December 2009 issue of Publishing Executive. It's an abridged version of Green Publishing Quiz. PubExec also ran a nice interview of me in its dead-dinosaur (aka Web) edition.

Biggest Scoops: Unlike most bloggers, I try to do some original reporting rather than just commenting on already published news. Dead Tree Edition was the first to predict no postage rate increases in 2010 and to reveal that the Postal Service was planning a Summer Sale. We also broke the news that the black liquor credits were larger than predicted, that AbitibiBowater would not emerge quickly from bankruptcy protection, and that NewPage would shut no more paper machines. Keep those tips coming, folks.

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